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There is no reason free trade and climate progress can’t coexist; yet the way Canada currently approaches the former poses a distinct threat to the latter. Take TransCanada’s $US15 billion NAFTA lawsuit against the U.S. for rejecting the Keystone XL pipeline: an eye-popping illustration of the potentially costly contradiction between Canada’s climate change agenda and our continued acceptance of investor-state arbitration provisions in free trade deals.

On one hand, Prime Minister Justin Trudeau promises to dramatically reduce greenhouse gas emissions pursuant to the Paris agreement on climate change. On the other, Canada continues to negotiate trade agreements that empower foreign corporations to challenge environmental laws and policies that reduce the value of their investments.

Canada is party to a growing number of trade agreements containing investor-state dispute settlement mechanisms (ISDS). The trend began with NAFTA and continued with the recent Foreign Investor Protection Agreement with China. ISDS mechanisms are also included in the Canada-EU Trade Agreement and the Trans-Pacific Partnership, both negotiated by the Harper government but not yet ratified.

These mechanisms allow foreign corporations to sue Canada for federal or provincial laws, policies, court decisions, or other actions that harm their investments.

The lawsuits filed under these agreements by foreign companies are decided not in Canadian courts, but in opaque international arbitration proceedings. Cases are adjudicated not by independent judges but by arbitrators who also act on behalf of foreign corporations, are not bound by Canadian law or precedents, and whose track record shows the odds are stacked against governments.

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The most glaring example of arbitrators’ bias toward investors is their sweeping interpretation of what is called “indirect expropriation.” Under Canadian law, only direct expropriation — such as government taking your land for a highway — creates a right of compensation. However if a government enacts an environmental law that prevents you from developing a portion of your property (indirect expropriation), you are generally not entitled to compensation. In contrast, ISDS tribunals have repeatedly held that indirect expropriation, caused by environmental rules, gives foreign investors the right to compensation.

So far, 38 NAFTA lawsuits have been filed against Canada by American corporations, the majority involving environmental rules or natural resources. Twelve cases have been concluded, requiring Canada to pay hundreds of millions of dollars in compensation and repeal environmental regulations. For example, Ethyl Corp. forced Canada to pay more than $15 million and repeal a regulation banning the use of a toxic gasoline additive.

Another 10 cases are ongoing, with American companies seeking billions in damages. Lone Pine Resources is seeking $250 million because Quebec created a moratorium on fracking for oil and gas under the St. Lawrence River. Sixteen cases have been withdrawn or are inactive, but still imposed significant costs on taxpayers.

As a major producer of oil, natural gas, and coal, committed to reducing greenhouse gas emissions, Canada is extremely vulnerable. American, Asian, and European companies have substantial stakes in Canadian fossil fuel resources. Stricter rules on the extraction of fossil fuels will be subject to challenge. For example, Chinese, Norwegian, French, and Dutch companies with investments in the oilsands could use ISDS lawsuits to attack Alberta’s recently announced carbon tax and emissions limits, seeking compensation for the adverse effects of these new rules on their profitability.

Advocates of enhanced rights for foreign investors claim that trade deals provide exceptions that allow governments to enact environmental policies. This assertion is misleading. While there is language in trade deals that purports to protect governments’ right to regulate, many arbitration panels have ignored or narrowly interpreted these provisions, making them practically useless.

Advocates also argue that Canada must accept ISDS provisions if we want free trade. This is false. Brazil enjoys high levels of foreign investment but refuses to ratify trade deals that include investor-state arbitration. Australia refused to include ISDS in their free trade deal with the U.S. India, Indonesia, and South Africa stated that they will avoid these provisions in the future, and renegotiate existing agreements to remove them.

Tackling the hydra-headed challenge of climate change is already difficult and costly for a fossil-fuel exporting nation like Canada. Why ratify trade deals that will make it even harder and more expensive?

Fortuitously, the European Union, faced with growing public opposition to ISDS, recently indicated a desire to reopen CETA negotiations with Canada on this issue. This is a timely opportunity for the Liberals to carve out a balanced position that, unlike their Conservative predecessors, advances free trade but also protects our ability to address climate change without the threat of multibillion dollar lawsuits from foreign fossil fuel companies.

Dr. David R. Boyd is an environmental lawyer and adjunct professor of Resource and Environmental Management at Simon Fraser University.

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